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Ronan Lyons, Daft's in-house economist, commenting on the latest Daft research on the Irish property market.

The latest Daft.ie House Price Report shows a 14% annual rise in asking prices
nationally, led in particular by Dublin, but with Leinster and the urban centres
of Cork and Galway also showing significant prices increases. The same trend is
evident from Property Price Register transactions, where analysis, controlling
for location, size and type of the unit, shows a 17% annual rise, again driven by
Dublin and Leinster.

Nonetheless, there remain large swathes of the country which have shown little or
no increase in property values in recent quarters. Asking prices are still lower,
year-on-year, in Limerick, both county and city, Clare, Mayo, Donegal and Cavan,
while in the rest of Munster, Connacht and Ulster outside the cities increases
have been small. This has been the case even as values have risen by a third in
most parts of Dublin and by more than 40% in both central Dublin and south county
Dublin. The graph below shows how spread out house price inflation has become
since 2012.

Figure 1. Spread of house price inflation, across counties

Unsurprisingly, such a dysfunctional housing market has attracted a lot of
commentary. The first of October saw no less than six reports on the market but
perhaps the most important development in recent days has been the Central
Bank's intervention. The Central Bank is proposing to limit two key ratios - the
loan-to-value (LTV) and loan-to-income (LTI) ratios - in order to prevent a
credit-driven bubble from occurring again.

The importance of these measures simply cannot be understated. It is said that
you should have 20-20 hindsight about the last crisis and, given Ireland's
housing bubble was almost entirely credit-driven, it is frankly somewhat
surprising that almost eight years on from the peak of the market, these measures
have not been introduced already. While experts can quibble about the exact
structure of the limits on LTV and LTI, policymakers and households can go about
their business, knowing that, roughly speaking, if first-time buyers save up one
year's salary, they will be lent four times that, and can plan accordingly.

Setting the maximum loan-to-value, and potentially also the maximum
loan-to-income, is one step in ensuring a healthy housing sector. But the
Central Bank's work is not done there. It needs to address the preponderance of
variable rate mortgages in Ireland. Ireland is more heavily reliant that any
other development country on mortgages whose repayment could increase
dramatically in the space of a year. Such mortgages are viewed as Weapons of
Financial Destruction in the US, where increasing mortgage repayments played
such a crucial role in igniting the housing market downturn that turned into the
Great Depression from which Europe in particular is still trying to escape.

Prudential regulation of the mortgage market is about protecting borrowers,
banks and taxpayers. This could be achieved by switching to a Danish-style
covered bond system. This can be summed up as follows: for a bank to issue
30-year mortgages worth €100m next year, they have to go off to the
international capital markets and raise a 30-year bond worth €100m. This tells
everyone the real cost of finance and, perhaps more importantly from the
Government's point of view, means that the taxpayer need not worry about having
to bail out banks.

If credit is one side of the housing market coin, supply is the other. Rationing
credit, however sensibly, puts a limit on house prices: indeed, that is the
point. To put some (round) numbers on it, suppose the average household has a
total income of €50,000 and, when the Central Bank has done its job, can
borrow no more than €200,000 with a €50,000 deposit. This sets a cap
on the average house price of €250,000.

Clearly, if the average home costs €300,000 to build, nothing will be built.
Even if the average home costs €200,000 to build, this is probably at the
limit of acceptable profit margins. If the average home costs just €150,000
to build, this should encourage building. And while many view construction with
suspicion given the legacy of the last housing bubble, this was the product of
tax breaks and easy credit, not a healthy construction sector.

A healthy construction sector is needed to deliver two of Ireland's most
important goals: international competitiveness and the human right to shelter.
If it is costly to build, it will be costly to rent and FDI projects that might
have come to Ireland will find somewhere elsewhere to call home. If it costly to
build, the subsidy required from the taxpayer to cover the cost of accommodating
those on the lowest incomes will be larger.

The Central Bank has taken the first steps to building a healthy housing sector.
It is up to Government to take the next, and find out how much it costs to build
a home and how to reduce that without sacrificing quality.